Citation: Papandony and Another v Citibank [2002] NSWSC 388
Court: Supreme Court of New South Wales (Equity Division, Commercial List)
Date: 14 May 2002
Judge(s): Gzell J
Background
The first plaintiff won Lotto in 1998 and incorporated the second plaintiff company to hold his winnings, opening an account in the company's name with St George Bank. A man named Brachmanis induced the first plaintiff to draw five bearer cheques totalling nearly $1 million, payable to various entities connected to Brachmanis, on the basis of a fabricated business scheme involving an exclusive distributorship for power tools and gardening products.
Each cheque was deposited into Brachmanis's personal account at Citibank (the defendant), which acted as the collecting bank. Citibank collected the proceeds from St George Bank and credited Brachmanis's account accordingly, even though the cheques were payable to third parties rather than to Brachmanis personally.
The plaintiffs initially pleaded both negligence and conversion, but abandoned the negligence claim before trial and pressed only their claim in conversion against Citibank.
Legal Issues
- Whether the drawing of the cheques was procured by fraud such that no concluded contracts arose, leaving the drawer as the true owner with an immediate right to possession.
- Whether Citibank's acceptance and collection of third-party cheques (cheques payable to someone other than its own customer) constituted the tort of conversion.
- Whether Citibank could rely on the statutory defence under s 95(1) of the Cheques Act 1986 (Cth), which protects collecting institutions that act in good faith and without negligence.
- Whether Citibank's subsequent crediting of funds to Brachmanis's account before notice of the fraud could ground a change of position defence.
- Whether contributory negligence was available as a defence to an action in conversion of a cheque.
Decision
Gzell J found that the cheques had been obtained through fraud and that no concluded contracts arose from the transactions underlying them. Because the transactions were void rather than merely voidable, the second plaintiff remained the true owner of the cheques and retained an immediate right to possession. That right was sufficient to ground a conversion claim.
The court found that Citibank's acceptance and collection of the cheques constituted a dealing repugnant to the plaintiffs' immediate right to possession, satisfying the elements of conversion. Citibank's own internal procedures required third-party cheques to be referred to a senior officer in the operations management division, who would ordinarily confirm the relationship between the depositing customer and the named payee. The evidence indicated that no such authorisation was obtained and that tellers had simply accepted the deposits without escalation.
On the statutory defence, s 95(1) of the Cheques Act 1986 (Cth) protects a collecting institution from liability to the true owner only where it acted in good faith and without negligence. Citibank called no evidence to explain how the third-party deposits came to be accepted. The court drew the inference that the bank's procedures were not followed, and concluded that Citibank had not discharged the burden of establishing that it acted without negligence. The statutory defence therefore failed.
The change of position defence was unavailable because that defence is relevant only to voidable transactions; here, the transactions were void. Contributory negligence was raised formally by Citibank's counsel to preserve the point, but was not argued, and the court noted the established Australian authority that contributory negligence is not a defence to conversion of a cheque.
Orders Made
- Judgment for the plaintiffs in the sum of $993,792 plus interest.
- The defendant to pay the plaintiffs' costs.
- The parties were directed to bring in short minutes of orders to that effect.
Key Takeaways
- A collecting bank that accepts third-party cheques without following its own internal authorisation procedures may be unable to establish that it acted "without negligence" for the purposes of the statutory defence under s 95(1) of the Cheques Act 1986 (Cth), causing that defence to fail.
- Where a cheque is drawn as a result of fraud that renders the underlying transaction void (not merely voidable), the drawer remains the true owner with an immediate right to possession, sufficient to sustain a conversion claim against a collecting bank.
- The change of position defence, and the related concept of acting to one's detriment, are relevant only where a transaction is voidable; they do not apply where the underlying transaction is void.
- Australian courts have consistently held that contributory negligence is not a defence to an action in conversion of a cheque, as confirmed by a line of authority across multiple Australian jurisdictions.
- A collecting bank bears the burden of proving it acted without negligence when relying on s 95(1); the absence of evidence explaining how non-compliant deposits came to be accepted will ordinarily defeat that defence.
Legislation and Cases Referenced
Legislation:
- Cheques Act 1986 (Cth), s 95(1)
Cases:
- Penfolds Wines Pty Ltd v Elliott (1946) 47 CLR 204
- Lloyds Bank v The Chartered Bank of India Australia and China [1929] 1 KB 40
- Marfani & Co Ltd v Midland Bank Ltd [1968] 1 WLR 956
- Cundy v Lindsay (1878) 3 App Cas 459
- North and South Wales Bank v Macbeth [1908] AC 137
- Midland Bank Ld v Reckitt [1933] AC 1
- Hunter BNZ Finance v ANZ Banking Group [1990] VR 41
- Orix Australia Corporation Ltd v M Wright Hotel Refrigeration Pty Ltd (2000) 155 FLR 267
- Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1987-1988) 164 CLR 622
- David Securities Pty Ltd v Commonwealth Bank of Australia (1991-1992) 175 CLR 353
- Nemur Varity Pty Ltd v National Australia Bank Ltd [1999] VSC 342
- Wilton v Commonwealth Trading Bank of Australia [1973] 2 NSWLR 644
- Day v Bank of New South Wales (1978) 18 SASR 163
- Grantham Homes Pty Ltd v Interstate Permanent Building Society Ltd (1979) 37 FLR 191
- Australian Guarantee Corporation Ltd v Commissioners of the State Bank of Victoria [1989] VR 617
- Associated Midland Corporation Ltd v Bank of New South Wales [1983] 1 NSWLR 533
- Morison v London County and Westminster Bank Ld [1914] 3 KB 356